America's Other Energy Revolution And Why It Matters

If you believe in the benefits of energy innovation, support national security or consider climate change to be a non-negligible threat to our planet, you need to stop listening to Al Gore and start reading Adam Smith.

Free markets and big-knuckled capitalism may not be perfect, but the basic principles they encompass are the point of departure - especially in the context of the electric power grid - for responding successfully to the energy challenge facing the United States. The key word is “successfully.”

The “energy challenge” actually encompasses three separate challenges. Richard Lester, a professor nuclear engineering at the Massachusetts Institute of Technology, deconstructed the world’s energy “problem” during a talk he gave at the National Governors Association Centennial Meeting in 2008.

“So far I've been talking about our energy problem,” said Lester. “But this is incorrect. Because we really have three separate problems, each on its own very difficult to solve.”

Lester concluded that “because the solutions to one will sometimes make the others worse, the overall difficulty is more than additive – the whole is greater than the sum of the parts.”

Nearly five years later, Lester's closing comment – “the whole is greater than the sum of the parts” – seems especially prophetic in the context of today’s electric power grid. Over the past decade, the U.S. electric power industry has reduced carbon emissions, reigned in demand growth and diversified the portfolio of energy resources used to generate electricity provided by the power grid. But, while “solving” these problems, it has arguably exacerbated factors that will discourage and potentially derail profound and desperately needed changes in the basic architecture of the modern energy economy.

In particular, the rise of utility-scale, centralized renewable energy and the associated infrastructure they will require are propagating an ossified, state-oriented system for providing and paying for electric service.

While this trend will reduce carbon emissions in the near term, it will also slow economic growth by strengthening the political influence of “entrenched interest groups work[ing] to secure a greater share of society’s resources.”

Note these fault lines. Renewable or non-renewable is a distraction from the bigger battle taking place over centralized and decentralized energy. In my view, the radical and pervasive decentralization of today’s energy economy is a matter of ‘when’ rather than ‘if.’ The future economic and military strength of the United States will be affected by how long it takes to happen.

The case for granting investor-owned utilities a monopoly franchise on the provision of electric service in a specific geographic territory has eroded considerably over the past half century and is now entering a phase of systemic collapse.

Electric and natural gas utilities that provide partial (or full) service to consumers are heavily regulated by government agencies, which set the price utilities charge customers for electric and gas service, the terms of that service, capital budgets and construction plans and so forth. The scope and scale of this bureaucratic enterprise is vast and the inefficiencies are epic. While not everyone appreciates the scope and scale of bureaucratic rot, it is hardly a secret. Indeed, we have historically tolerated these institutional anachronisms because we think they are “natural monopolies.”

The thinking dates back to the mid-19th Century, when the English philosopher, John Stewart Mill, postulated his theory of natural monopolies. Mill claimed that, “gas and water service in London could be supplied at lower cost if the duplication of facilities by competitive firms were avoided; and that (b) in such circumstances, competition was unstable and inevitably was replaced by monopoly.”

In a recent primer on electric utility regulation, the Regulatory Assistance Project, a highly respected think tank based in Montpelier, Vermont, elaborated on Mill’s argument for granting electric utilities geographically constrained monopolies on the provision of electric service:

The technological and economic features of the industry are also such that a single provider is often able to serve the overall demand at a lower total cost than any combination of smaller entities could. Competition cannot thrive under these conditions; eventually, all firms but one will exit the market or fail. The entities that survive are called natural monopolies — and, like other monopolies, they have the power to restrict output and set prices at levels higher than are economically justified.

In the case of natural gas and water, this logic seems as persuasive today as it did when Mill first articulated it. The same cannot necessarily be said for electricity.

The Rocky Mountain Institute explained one of the critical reasons this is so: “Central thermal power plants stopped getting more efficient in the 1960s, bigger in the 1970s, cheaper in the ‘80s, and bought in the ‘90s . . . [unlike the efficiency limits of large centralized power plants,] smaller units offered greater economies from mass production than big ones could gain through unit size.”

[T]he U.S. power system began moving away from centralized generation almost 40 years ago, but the transition went virtually unnoticed. For the previous several decades, electrical engineers had developed boilers that could withstand enormous and increasing amounts of heat and pressure. Boilers could reach temperatures exceeding 1,050 ºF and pressures above 3,200 pounds per square inch, turning water into dry steam. Utility companies had employed an array of new alloys to protect a power plant’s metal from corrosion and fatigue. They also met rising power demands with larger turbines, and they demanded that equipment manufacturers build bigger and bigger units, often without taking the time to test and learn from each incremental increase.

But progress stalled in 1967, which represented the peak in power plant efficiency. Despite continuing efforts by utility engineers, no longer would new generating equipment be more efficient than the machinery it replaced. Continued expansion would no longer mean lower prices for the consumer.

Scientists, using thermodynamic theory and calculating the limits of materials, long had predicted a steam generator’s maximum efficiency to be approximately 48%. Thus, for every 100 units of fuel burned, a power plant could generate at most 48 units of electricity. The remaining 52 units would become low-temperature heat, usually disposed of as waste into adjacent rivers or the air.

As recently as the 1960's, electric utilities were experiencing high productivity growth, declining prices and consistently strong financial performance. Today, there is abundant and compelling evidence that shows the failure of prevailing norms of utility regulation and grid governance by many if not most metrics. In previous eras, technology limited society's ability to cut at the proverbial joints of these governance regimes. That has changed significantly over the past decade as a result of technological advances distributed power solutions. Take microturbine technology.

Microturbines provide high electrical efficiency compared with traditional gas turbines in the same size class. The recuperator that recycles a portion of the exhaust energy back into the energy conversion process produces the efficiency advantage. [The chart featured below] illustrates the competitive offerings of several microturbine manufacturers plus selected larger gas turbines. Note that microturbines offer the highest electrical efficiency, up to about 5 MW, which is the size of the first traditional gas turbine offered in a recuperated model.

To borrow a line from RMI's Amory Lovins, “Central thermal stations have become like Victorian steam locomotives: magnificent technological achievements that served us well until something better came along.”

The leaps and bounds in clean, distributed generation have reduced costs, raised efficiency and demonstrated increasingly high levels of reliability. By doing so, they have made once-unthinkable governance paradigms viable alternatives to the era of bureaucratic drift and the political Frankenstein of large combo utilities and multi-layered regulators that benefit from it.